1. Field of the Invention
The present invention relates to a method of conducting auctions, particularly original issuer municipal bond auctions, over electronic networks, particularly the Internet.
2. Description of the Prior Art
A conventional auction is a prior art process in which bids from bidders are received by an auctioneer for an item to be sold. The bidder whose bid is the highest at the termination of the auction (the "successful bidder") becomes the purchaser of the item.
Auctions may be conducted in a variety of ways. In the "silent real-time" auctions bidders are made aware at all times of the magnitude of the current highest bid but do not know the identity of the highest bidder. So long as the auction is still in progress, the bidders may increase their bids. Silent real-time auctions generally end at a specific announced time and any bid submitted by that time is considered in determining the successful bidder.
Another style is the "public real-time" auction, in which bidders are made aware both of the current highest bid and the identity of the bidder. Public real-time auctions are conventionally held by open verbal outcry and are terminated by the fall of the auctioneer's hammer after warning is given to the bidders of the imminent close of the auction.
Other types of auctions are known. In a sealed-bid auction, bidders are given the chance to make only one secret bid. They do not know either the current highest bid or the identity of the current highest bidder. In a "silent and blind auction" the specific bids and identity of the bidders is maintained in secret until close of the auction. Yet other types of auctions differ from the foregoing in that offers to sell may be made by the auctioneer in decreasing price increments, the first buyer to accept a bid being the winner. This type of auction is also known as a "Dutch flower auction." In another type, the winner is the party who makes the highest bid, but he pays the amount bid by the second-highest bidder. Many variations on these auctions are also known.
It is a drawback of the above types of auctions that the bidders must either gather together in the same physical location with the auctioneer or remain in contact with the auctioneer by telephone or video conference facility. Bidders who are in the physical presence of the auctioneer may have an advantage because they are able to respond to the auctioneer's reaction to a bid more rapidly than those at remote locations are.
A variety of electronic-auctioning and trading systems have been developed, including electronic auction systems relating to financial instruments. Examples of these can be seen in U.S. Pat. No. 5,640,569 to Miller et al, U.S. Pat. No. 5,375,055 to Togher et al, U.S. Pat. No. 5,243,515 to Lee, U.S. Pat. Nos. 5,136,501 and 5,077,665 to Silverman, et al, U.S. Pat. Nos. 4,980,826 and 4,903,201 to Wagner, U.S. Pat. No. 4,789,928 to Fujisaki and U.S. Pat. No. 3,581,072 to Nymeyer.
The Miller patent is directed to an electronic "auctioning" system specifically directed to allocating computer resources such as transmission bandwidth of a multiplicity of network links interconnecting the users. The system uses a type of second price sealed bid method. The system allocates resources to maximum declared values based upon the second highest bid such that successful bidders are charged what is referred to as an opportunity costs for the goods.
The Togher et al patent discloses a credit management system for an electronic brokerage system. The brokerage system disclosed involves a communications network for facilitating the buying and selling of large blocks of foreign currency. In particular the system provides that each bid or offer for bid for a particular type of financial instrument is prescreened by the system for compatibility with limited credit information. The system identifies that, at least in currency, the resulting price may be based upon a composite of bids for small sizes or lots of the currency in question.
The Lee patent discloses a secure teleprocessing bidding system relating to a secret bidding process. The system maintains the bids secret from other bidders until after the period for bidding is closed. The system is intended to eliminate bid procedure violations and provides an electronic record of the bids received.
The Silverman et al patents disclose an electronic trade matching system for trading instruments in which bids are automatically matched against offers for the given trading instruments. The system uses a network to connect the host computer with bidding and offering clients of the system.
The Wagner patents disclose a voice actuated futures trading exchange. The system is described as a computerized public outcry exchange system for transacting sales of a particular futures commodity contract by members of a futures trading exchange wherein bids to purchase or offers to sell the particular commodity are made by members through remote terminals and the exchange computer automatically matches offers and bids to complete the transaction. The system provides that the offers may be orally entered into the system.
The Fujisaki patent discloses an auction information transmission processing system that sets up a hierarchical system of host and server computers, which are configured to minimize the data transmitted between computers during an auction. The system is designed to allow auction participants to be spread out over a wide area. The system was directed to auctioning of specific items such as used cars.
None of the above described patents are directed to original issuer auctions of financial instruments. With auctions of various financial instruments there is a significant difference between the original issuer and subsequent resale of portions of this instrument in the secondary market. Once in the secondary market the financial instrument or portions thereof become fungible commodities appropriate for trading in various trading forums including some of the electronic trading systems described above. The present invention is directed to original issuer auctions, which involve distinctly different issues than those associated with the secondary market.
None of the existing electronic trading or auctioning systems addresses the needs of original issuer auctions of financial instruments, such as municipal bonds. In the domain of original issuer municipal bond auctions, conventionally competitive bids for new municipal bond offerings are submitted to the issuer via fax machine or US mail or in person and qualified bids must be for all of the bonds in the issue ("all-or-none"). In addition to fax submissions, 21.sup.st Century Municipals, Inc. has developed a modem based electronic bid submission system using a computer network and sold under the trademark PARITY. The PARITY bid submission system allows bidders who have previously obtained and installed appropriate software to electronically submit bids in an auction over a computer network. The PARITY system is designed to be used together with fax and other bid submission methods during an auction. The PARITY system is designed as a sealed bid system such that the bids received are not reviewed until after the auction closes, and there is no feedback to the bidders during the auction.
In a conventional original issuer municipal bond auction, there is a fixed time (e.g. 10:30 a.m., EST) on a predetermined date ("sale date") that bids must be delivered to the issuer. Because bidders are sensitive to on-going interest rate movements in the capital markets while preparing their bid, they prefer to wait until the last minute before submitting the bid to be as competitive as possible and avoid the risk that other bidders will learn the details of their bid before the deadline. This system essentially mimics a sealed bid arrangement in this respect.
It is a drawback of bids submitted by mail that the bids must be submitted too far in advance to competitively reflect the market conditions when the bid is due.
It is a drawback of fax auction methods that faxed bids are transmitted after the deadline, fax clocks are not set properly and record the incorrect time in fax headers, fax transmission interruptions outside the control of the sender and receiver and machine malfunctions such as paper misfeeds occur.
It is a drawback of in-person bidding methods that bidders have difficulty locating the place where bids are to be delivered or may experience traffic or other delays in submitting bids. Also, because the most frequent participants in competitive bids for new issues are located in New York City and the issuers are in other parts of the country, it is extremely difficult for many bidders to deliver their bids in person.
It is a drawback of the PARITY bid submission system that to use electronic bid submission the bidders must previously obtain and install the appropriate software, resulting in essentially a closed computer network. An additional drawback with the PARITY system is that no feedback is provided to the bidders. The system incorporates all of the drawbacks inherent in these other bid submission systems.
It is a drawback of prior art bidding methods for original issuer auctions of financial instruments that frequently bids are not submitted in conformity with issuers' specifications as set forth in a Notice of Sale or similar solicitation document. It is a drawback of fax bid methods that faxes may not be legible at the receiving end. These problems can create controversy between bidders and embarrass municipal officials and their financial advisors conducting original issuer municipal bond auctions. They can also cost the issuer money (e.g. if the best bid has to be disqualified as a result of one of these malfunctions or mistakes).
Further drawbacks of prior art bidding methods in original issuer municipal bond auctions are:
1. Bidders cannot see bids submitted by other bidders and are thus precluded from using this information to make their bids more competitive; PA0 2. Once having submitted a bid, a bidder is not given an opportunity to correct or improve their bid in the event it does not conform in some way to the issuer's bids specifications; PA0 3. Bidders cannot submit bids for selected bond maturities; bids must be "all-or-none"; meaning they must purchase every single maturity in the issue or none of them; PA0 4. Regional and small underwriters are precluded from submitting bids because they do not have sufficient capital or desire to purchase every maturity in an issue (i.e. all-or-none); PA0 5. Institutional investors and other bidders who are not underwriters do not submit bids because they desire only selected maturities rather than all of the bonds in an issue; PA0 6. There is a delay after bids are submitted and before awarding a contract to the successful bidder because it is necessary for the issuer to transcribe the bids into a computer spreadsheet or other program that computes which bid is the best one; furthermore, it is usually necessary to resize the principal maturity amounts after determining the winning bid, which results in further delays before the sale is made; PA0 7. There is no effective security mechanism to reassure issuers that bids submitted via fax or other method are bona fide offers from qualified bidders; PA0 8. There is no built-in safeguard that alerts bidders before submitting their bid when they attempt to make a bid which does not conform to the issuer's specifications (e.g., exceeding the issuer's premium or discount limitations, interest rate coupons which are not multiples of a predetermined percentage, etc.).
The prior art does not disclose a method of conducting original issuer municipal bond auctions mediated by computer in which the bidders may be distributed in different physical locations yet by which either a silent real-time auction or a public real-time auction may be conducted.